...Cardinal and Ordinal Utility Introduction: Utility refers to the satisfaction that a consumer obtains from the purchase and use of commodities and services. According to economics there are two theories that are able to measure the satisfaction of individuals. These are the cardinal utility theory and the ordinal utility theory. There are a number of differences between the two in the methodologies that they use to measure consumption satisfaction Cardinal Utility Cardinal utility states that the satisfaction the consumer derives by consuming goods and services can be measured with numbers. Cardinal utility is measured in terms of utils (the units on a scale of utility or satisfaction). Goods and services that are able to derive a higher level of satisfaction to the customer will be assigned higher utils and goods that result in a lower level of satisfaction will be assigned lower utils. Cardinal utility is a quantitative method that is used to measure consumption satisfaction. Ordinal Utility Ordinal utility states that the satisfaction the consumer derives from the consumption of goods and services cannot be measured in numbers. Ordinal utility uses a ranking system in which a ranking is provided to the satisfaction that is derived from consumption. Goods and services that offer the customer a higher level of satisfaction will be assigned higher ranks and the opposite for goods and services that offer a lower level of satisfaction. Ordinal utility is a qualitative method that...
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...Utility means satisfaction which consumers derive from commodities and services by purchasing different units of money. “Ineconomics, utility is a measure of satisfaction;it refers to the total satisfaction received by a consumer from consuming a good or service. Utility is often affected by consumption of various goods and services, possession of wealth and spending of leisure time.s CONSUMER BEHAVIOUR • It is the study of how people buy, what they buy, when they buy and why they buy. • It attempts to understand the buyer decision processes/buyer decision making process, both individually and in groups. • It also tries to assess influences on the consumer from groups such as family, friends, reference groups, and society in general. • The theory of consumer behavior in managerial economics depends on a) Budget • constrained by income and the price of the goods, • The budget constraint specifies the combination of goods the consumer can afford to buy. b) Preferences • Economists use the concept of utility to describe preferences. • There are some assumptions of consumer behavior theory like :- a) rational behavior b) clear cut preferences • Consumer behaviour can be explained using two main approaches: 1. Marginal Utility Theory (The Cardinalist Approach); and 2. Indifference curve Analysis (The Ordinalist Approach) 1. MARGINAL UTILITY THEORY (THE CARDINALIST APPROACH) • developed by Alfred Marshall who introduced an imaginary unit called the...
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...Best Answer Consumer Behavior from a Cardinalist and Ordinalist Approach Utility means satisfaction which consumers derive from commodities and services by purchasing different units of money.From Wikipedia, the free encyclopedia "Ineconomics, utility is a measure of satisfaction;it refers to the total satisfaction received by a consumer from consuming a good or service. "Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility. Utility is often affected by consumption of various goods and services, possession of wealth and spending of leisure time. According to Utilitarian's, such as Jeremy Bentham (1748- 1832) and John Stuart Mill (1806-1873), theory "Society should aim to maximize the total utility of individuals, aiming for "the greatest happiness for the greatest number of people". Another theory forwarded by John Rawls (1921-2002) would have society maximize the utility of those with the lowest utility, raising them up to create a more equitable distribution across society. Utility is usually applied by economists in such constructs as the indifference curve, which plot the combination of commodities that an individual or a society would accept to maintain at given level of satisfaction. Individual utility and social utility can be construed as the value of a utility function and a social welfare function respectively. When coupled with ...
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...Contents Utility before 1920’s 2 Utility measurements 2 CARDINALIST AND ORDINALIST UTILITY APPROACH OF CONSUMER BEHAVIOUR 3 CARDINALIST UTILITY APPROACH 3 Marginal utility 4 Assumptions of Cardinal Utility Analysis: 5 Cardinal Measurement of Utility 5 Rationality 6 Diminishing marginal utility 6 ORDINALIST UTILITY APPROACH 7 Rational behavior of the consumer 8 Ordinal Utility 8 Diminishing marginal rate of substitution 8 Consistency selection 8 Transitivity/Consumer’s preference is not self-contradictory 8 Goods consumed are substitutable 9 ECONOMIES AND DISECONOMIES OF SCALE 16 ECONOMIES OF SCALE 16 Definition: 16 Internal economies of scale 16 External economies of scale 18 DISECONOMIES OF SCALE 20 Internal diseconomies of scale 20 External diseconomies of scale 21 CONCLUSION 22 INTRODUCTION Utility before 1920’s: One reason why utility theory was not of great significance is explained by the “ Paradox Value” by economist/philosopher Adam Smith in 1800’s. Also known as Diamond-Water Paradox, it addressed why absolute necessities such as water are valued (priced) so cheaply, while frivolities like diamonds are highly valued and command outrageous prices. Many economists then thought utility was not the cause of price and therefore concentrated on cost of production as the explanation of price.It was until economist Jevons (1871), established how the paradox value could be resolved by associating price with degree of utility, that is marginal...
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...Within-Establishment Wage Inequality and Satisfaction Many authors have analyzed about the determinants of individuals subjective assessment of the utility which gained from their work of environment. Income comparison is important in determining workers job pay satisfaction. The job satisfaction is not only determined by wages only but also by relatives wages. There are two main reason, the first one is the workers preferences may depend directly on their salary relative to their own reference groups. So, the workers derive the well being from their social status and this model will come out a negative relation between well being and the inequality. Secondly indicates the workers may use others wages to help in their own future wage. The more workers earn, then the workers will more happy or satisfaction to their wages. So this model predict workers may appreciate inequality if the signals future potential career improvement. Model the individual utility from pay as a function of a workers own wage and the earnings of all other workers within same establishment, using employee data, and assume incomplete information about others wages and control establishment unobserved heterogeneity. The positive relationship exist between well being and inequality. Review the literature of the models of relative concerns where it will vary positively with the absolute wage level and negatively with the number of hours worked by neoclassical. Next will using empirical...
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...market for his/her end-use to satisfy wants is called a consumer. Example- Mr. A purchases pen from market and Mrs. X got her dress dry-cleaned from a shop, in this case Mr. A and Mrs. X both are the consumers as Mr. A is purchasing a good for final use and Mrs. X a final user of the service available in the market. A rational consumer is a consumer who seeks to maximise utility or satisfaction in spending his income. Now let us study about consumer behaviour. Consumer behaviour is the behaviour of individuals when buying goods and services for their own use or for private consumption. The consumer has to decide on how much of each of the different goods he would like to consume and the choice of the consumer depends on the alternatives that are available to him and on his tastes and preferences regarding those alternatives. Accordingly, the economists study the two aspects of consumer behaviour. First, on what basis a rational consumer allocates the limited income between different goods and services the consumer desires. Of course, the objective behind the allocation is maximisation of satisfaction. Technically, it is called consumer’s equilibrium. Second, what is the reaction of a consumer to change in price of a good or a service he intends to buy? How does he usually react? Does he buy more? Does he buy less? Does he buy the same quantity? The generalisation of behaviour in this respect is called law of demand. Preliminary Notations and Assumptions...
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...Table of Contents 1. INTRODUCTION 1.1 The Multiplex Revolution in the World 1.2 Multiplexes arrive in India 1.3 Wave Multiplex, Lucknow 1.4 Future of Multiplexes in Lucknow 2. OBJECTIVES 3. PLANNING 4. DETAILS OF DATA COLLECTION 4.1 Sources of Data 4.2 Data Collection 4.3 Demographic Profile of respondents 4.4 Raw data conversion to meaningful data 5. ANALYSIS 5.1 Customer Satisfaction 5.1.1 Algorithm for computation of Satisfaction Levels 5.1.2 Explanation of Algorithm 5.1.3 Analysis from Satisfaction Levels 5.1.4 Results 5.2 Income Demand Elasticity 5.2.1 Aim 5.2.2 Data Collected 5.2.3 Interpretation of Data 5.2.4 Utility Curves 5.3 Price Demand Elasticity 5.3.1 Aim 5.3.2 Data Collected 5.3.3 Interpretation of Data 5.3.4 Utility Curves 5.4 Utility Curves 5.4.1 Aim 5.4.2 Data Collected 5.4.3 Interpretation of Data 5.4.4 Utility Curves 5.5 Preference Chart 5.5.1 Aim 5.5.2 Inference from Preference chart and supplementary data 6. RECOMMENDATIONS 7. LIMITATIONS 1. INTRODUCTION 1.1 The Multiplex Revolution in the World In 1985, a leisure centre opened in the new town of Milton Keynes, Buckinghamshire, and included a ten-screen 'multiplex' cinema that was designed and operated by an American company .Multiplexes proliferated from 1989 onwards, mainly built by American companies and emphasizing Hollywood movies. 1.2 Multiplexes arrive in India Multiplexes are...
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...When a customer enjoys basket A better than B, and B better than C we assume that the preferences are transitive and accept that for him A > C. 3. Finally we assume that the customer will always be glad to have more of a product than to have less, and more will raise the utility. John will be my example to explain the theory. His budget is £100. He likes two products: wine and cheese. The price per item is £5 for cheese, and £20 for wine. The budget line represents the maximum amount of either John can buy. To get the line we divide the budget by the price of the item, in order to get the maximum quantity of each bundle and then connect the points on the graph: Quantity of wine Quantity of wine 20 20 5 5 The slope of the line is ∆W/∆C = - (Pw/Pc) The slope of the line is ∆W/∆C = - (Pw/Pc) Quantity of cheese Quantity of cheese We can represent someone’s preferences with a function that we call utility function. It helps us apply the indifference curve by plotting combinations of baskets on a line that give the same total satisfaction to our customer. To get the indifference curve we can suppose that John’s utility is u(W,C) = 2W + C We pick all baskets that give the same utility, plant them on the graph and connect them. We should also clarify what MRS means. It is the marginal rate of...
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...price of the goods, • The budget constraint specifies the combination of goods the consumer can afford to buy. b) Preferences • Economists use the concept of utility to describe preferences. • There are some assumptions of consumer behavior theory like :- a) rational behavior b) clear cut preferences • Consumer behaviour can be explained using two main approaches: 1. Marginal Utility Theory (The Cardinalist Approach); and 2. Indifference curve Analysis (The Ordinalist Approach) 1. MARGINAL UTILITY THEORY (THE CARDINALIST APPROACH) • developed by Alfred Marshall who introduced an imaginary unit called the util as a means of measuring utility. • 1 util = 1 unit of money. • Utility is additive. • This approach was termed cardinal since cardinal numbers could be used to measure utility. • Each consumer chooses quantity demanded of all goods and services in order to maximize his/her utility or want satisfying power, given the limits imposed by available income. • The concept of utility is ethically neutral. Total utility • Total utility is the total benefit/satisfaction obtained from all the units of a particular product consumed • Total utility depends on the person's level of consumption - more consumption generally gives more total utility. Marginal Utility • Marginal utility is the additional utility derived from the consumption of one more...
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...the individuals’ satisfaction (or utility) is increasing. a. Joe has convex preferences and dislikes both hamburgers and soft drinks. Since Joe dislikes both goods, he prefers less to more, and his satisfaction is increasing in the direction of the origin. Convexity of preferences implies his indifference curves will have the normal shape in that they are bowed towards the direction of increasing satisfaction. Convexity also implies that given any two bundles between which the Joe is indifferent, any linear combination of the two bundles will be in the preferred set, or will leave him at least as well off. This is true of the indifference curves shown in the diagram. b. Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down the drain rather than drink it. Since Jane can freely dispose of the soft drink if it is given to her, she considers it to be a neutral good. This means she does not care about soft drinks one way or the other. With hamburgers on the vertical axis, her indifference curves are horizontal lines. Her satisfaction increases in the upward direction. c. Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite. Since Bob will drink the soft drink in order to be polite, it can be thought of as a “bad”. When served another soft drink, he will require more hamburgers at the same time in order to keep his satisfaction constant. More soft...
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...The satisfaction someone receives from consuming commodities is called utulity.Total utility refers to the total satisfaction from consuming some commodity. For example, the total utility of consuming 10 units of any commodity is the total satisfaction those 10 units provide. Marginal utility refers to the change in satisfaction resulting from consuming a little more or a little less of the commodity. The marginal utulity of the tenth unit consumed is the additional satisfaction provided by the consumption of that unit, or in other words, the difference in total utility gained by consuming 9 units and by consuming 10 units. The significance of this distinction can be seen by considering two questions: (1) If you had to give up consuming one of the following commodities completely, which would you choose: water or the movies? (2) If you had to pick one of the following, which would you choose: increasing your water consumption by 35 gallons a month (the amount required for an average bath) or attending one more movie a month? In (1) you are comparing the value you place on your total consumption of water with the value you place on all your attendance at the movies. You are compering the total utility of your water consumption with the total utility of your movie attendance. There is little doubt that everyone would answer (1) in the same way revealing that the total utility derived from consuming water exceeds the total utility derived from attending the movies. In (2)...
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...Chapter 6 Questions 2a. 2c. 2b. Marginal Utility: After 1st: 100 After 2nd: 85 After 3rd: 60 After 4th: 40 After 5th: 30 After 6th: 20 After 7th: 10 After 8th: 5 2d. This is reasonable because marginal utility is the additional satisfaction resulting from consuming one more unit of a certain product. Brett likes avocados, and each avocado will increase his total utility. However after some point each successive avocado adds less to his total utility compared to the previous one. 3A. Utility maximization requires that the marginal utility per dollar spent on each good should be equated for both goods. If this equality does not hold then the pattern of expenditure can be changed in a way as to increase total utility. Consume less of X and more of Y (more you consume the smaller the marginal utility). 3B. Consume less of X and more of Y. 3C. Do not change the pattern of consumption. 3D. Do not change the pattern of consumption. 3E. Consume less of X and more of Y. 4a. The sum of Rupert’s willingness to pay for the first five pizzas is $18 + $16 + $13 + $9 + $4 = $60.00. Therefore Rupert would be willing to pay $60 per week for these five pizzas - this is the total value that Rupert places on five weekly pizzas. 4b. Rupert will purchase pizzas until his willingness to pay for the next pizza is less than the market price (as listed in the table). At a price of $10 per pizza, Rupert will buy three pizzas per week. This is because by the fourth...
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...Perceptions in the marketplace. A positive price simply describes how much something costs whereas a normative price describes what something ‘should cost’ based on an individual’s or a group’s opinion. Usually there are consumer expectations that help guide the normative price. For example, how many times have you heard that, ‘my water bill is too high!” This interaction between positive price and normative price is an ongoing phenomenon and of particular interest to marketers who attempt to create and sustain customer satisfaction. d. Competition and Competitors’ pricing strategies Third, if the firm functions in a market where there are many competitors offering similar products, the firm may not have a choice about what level price to seek. thus, we first assess buyers’ perception of how much they would expect to pay for a product or service based on the utility (or usefulness) they would expect to derive from product or service and combine these individual utility functions to create a demand curve for the product in question. The % of a consumer’s income allocated to spending on the good – goods and services that take up a high proportion of a household’s...
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...Utility means satisfaction which consumers derive from commodities and services by purchasing different units of money.From Wikipedia, the free encyclopedia “Ineconomics, utility is a measure of satisfaction;it refers to the total satisfaction received by a consumer from consuming a good or service. “Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility. Utility is often affected by consumption of various goods and services, possession of wealth and spending of leisure time. According to Utilitarian’s, such as Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873), theory “Society should aim to maximize the total utility of individuals, aiming for "the greatest happiness for the greatest number of people". Another theory forwarded by John Rawls (1921–2002) would have society maximize the utility of those with the lowest utility, raising them up to create a more equitable distribution across society. Utility is usually applied by economists in such constructs as the indifference curve, which plot the combination of commodities that an individual or a society would accept to maintain at given level of satisfaction. Individual utility and social utility can be construed as the value of a utility function and a social welfare function respectively. When coupled with production or commodity constraints, under some assumptions, these functions can be used to analyze...
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...Executive summary Advertisement campaign in relation to neoclassical theory of consumer, understanding what consumer behavior in terms of their wants and needs, not forgetting their personality, attitude, perception, is not only important to marketers whose main goal is to make profit but also to the government and its various regulatory agencies and the whole society. Such a theory is usually based on a consumer image as one of the highest rational decision maker that widely seeks to maximize customer satisfaction by way of providing an informed and reasoned analysis of utility and value. The consumer behavior is known to create strong assumptions which are based on both computational and informational bases of consumer theory. Contents 1.0 Description of the advertisement 3 2.0 Market Group 4 3.0 Problem recognition 5 4.0 Neoclassical consumer theory 6 5.0 Application of neoclassical theory of consumer 8 6.0 Conclusion 9 7.0 Work cited 10 Consumer Behavior 1.0 Description of the advertisement The advertising campaign is for an airline company QANTAS that has its base in Australia. It has a picture of a young girl having fun while watching a movie using the toy movie machine. The airline is targeting plane travelers by promising to offer the best flight entertainment. This according to the airline will be able to have them enjoy their journey through entertainment and not be able to realize how long the journey is. The airline...
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